ZYN and IQOS Scale Up: Is Philip Morris Leading the Industry Reset?

Philip Morris (PM) is rapidly shifting towards smoke-free products, which now account for 44% of Q1 gross profit, driven by strong growth in IQOS and ZYN; ZYN shipments surged 53% year-over-year, leading to an increased 2025 shipment forecast of 800-840 million cans. This transition is boosting profitability, with smoke-free gross margins exceeding 70%, significantly higher than traditional combustibles, as competitors like Altria and British American Tobacco also increase investments in the space. PM's stock has rallied 52.3% YTD, trading at a forward P/E of 23.34x, above the industry average.

Analysis

Philip Morris International (PM) is demonstrating significant progress in its strategic pivot to smoke-free products, which constituted 44% of its total gross profit in the first quarter of 2025. This transition is spearheaded by robust performance from its IQOS heat-not-burn devices, which saw a 9.4% growth in HTU-adjusted IMS, and particularly its ZYN oral nicotine pouches, whose shipments surged 53% year-over-year to 202 million cans in Q1. Consequently, PM has raised its 2025 ZYN shipment guidance to 800-840 million cans. The financial benefits are substantial, with smoke-free organic revenues increasing by 20.4% and gross profit by 33.1% in the quarter, yielding a gross margin exceeding 70% for this segment, far surpassing that of combustible products. PM's smoke-free offerings are now available in 95 markets with 38.6 million adult users. Reflecting this strong operational momentum, PM's stock has rallied 52.3% year-to-date, outperforming the industry's 37% growth, and trades at a forward price-to-earnings ratio of 23.34x, above the industry average of 15.33x. This premium valuation is supported by consensus earnings growth estimates of 13.7% for 2025 and 11.7% for 2026. While competitors like Altria (MO), with its on! pouches growing 18% in Q1 2025 shipments, and British American Tobacco (BTI), targeting 50% revenue from non-combustibles by 2035, are also advancing their smoke-free portfolios, PM currently appears to be leading the industry reset amidst intensifying competition.

Key Decisions for Investors

• Given Philip Morris's strong execution in the high-growth, high-margin smoke-free segment, particularly with ZYN and IQOS, investors may find the stock attractive despite its premium valuation relative to the industry.
• Investors should closely monitor ZYN's shipment volumes and market share trends, as continued outperformance in this category is crucial for sustaining PM's growth trajectory and justifying its current market valuation.
• The intensifying competition from Altria and British American Tobacco warrants careful observation, as their progress in smoke-free alternatives could impact PM's market dominance, pricing power, and long-term growth outlook in the evolving nicotine market.